Intrinsic value of Telefonica ADR - TEF

Previous Close

$8.69

  Intrinsic Value

$42.48

stock screener

  Rating & Target

str. buy

+389%

Previous close

$8.69

 
Intrinsic value

$42.48

 
Up/down potential

+389%

 
Rating

str. buy

We calculate the intrinsic value of TEF stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2017), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 43.8

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046
   2047

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  14.00
  13.10
  12.29
  11.56
  10.90
  10.31
  9.78
  9.30
  8.87
  8.49
  8.14
  7.82
  7.54
  7.29
  7.06
  6.85
  6.67
  6.50
  6.35
  6.22
  6.09
  5.98
  5.89
  5.80
  5.72
  5.65
  5.58
  5.52
  5.47
  5.42
Revenue, $m
  71,176
  80,500
  90,393
  100,844
  111,841
  123,376
  135,446
  148,049
  161,187
  174,867
  189,098
  203,893
  219,271
  235,250
  251,857
  269,116
  287,060
  305,722
  325,138
  345,348
  366,394
  388,322
  411,179
  435,018
  459,892
  485,858
  512,976
  541,310
  570,925
  601,891
Variable operating expenses, $m
  47,575
  53,102
  58,966
  65,161
  71,680
  78,518
  85,672
  93,143
  100,931
  109,040
  112,092
  120,862
  129,977
  139,450
  149,293
  159,524
  170,161
  181,223
  192,732
  204,712
  217,188
  230,186
  243,735
  257,866
  272,611
  288,003
  304,077
  320,873
  338,428
  356,784
Fixed operating expenses, $m
  14,317
  14,632
  14,954
  15,283
  15,619
  15,963
  16,314
  16,673
  17,040
  17,415
  17,798
  18,189
  18,590
  18,999
  19,416
  19,844
  20,280
  20,726
  21,182
  21,648
  22,125
  22,611
  23,109
  23,617
  24,137
  24,668
  25,210
  25,765
  26,332
  26,911
Total operating expenses, $m
  61,892
  67,734
  73,920
  80,444
  87,299
  94,481
  101,986
  109,816
  117,971
  126,455
  129,890
  139,051
  148,567
  158,449
  168,709
  179,368
  190,441
  201,949
  213,914
  226,360
  239,313
  252,797
  266,844
  281,483
  296,748
  312,671
  329,287
  346,638
  364,760
  383,695
Operating income, $m
  9,284
  12,766
  16,473
  20,400
  24,542
  28,896
  33,460
  38,233
  43,217
  48,412
  59,208
  64,842
  70,704
  76,802
  83,147
  89,748
  96,619
  103,772
  111,223
  118,987
  127,081
  135,524
  144,335
  153,535
  163,145
  173,188
  183,688
  194,672
  206,165
  218,196
EBITDA, $m
  25,216
  30,080
  35,253
  40,728
  46,500
  52,564
  58,917
  65,558
  72,488
  79,711
  87,233
  95,059
  103,200
  111,666
  120,472
  129,631
  139,161
  149,080
  159,409
  170,168
  181,381
  193,074
  205,272
  218,004
  231,300
  245,192
  259,711
  274,894
  290,776
  307,396
Interest expense (income), $m
  -2,262
  4,149
  5,146
  6,297
  7,518
  8,808
  10,166
  11,590
  13,080
  14,636
  16,258
  17,946
  19,703
  21,530
  23,428
  25,401
  27,451
  29,582
  31,797
  34,101
  36,497
  38,992
  41,591
  44,298
  47,119
  50,062
  53,133
  56,339
  59,686
  63,184
  66,840
Earnings before tax, $m
  5,135
  7,620
  10,176
  12,882
  15,734
  18,730
  21,870
  25,153
  28,581
  32,155
  41,262
  45,139
  49,174
  53,374
  57,746
  62,297
  67,037
  71,976
  77,123
  82,490
  88,089
  93,934
  100,038
  106,415
  113,082
  120,055
  127,350
  134,985
  142,981
  151,356
Tax expense, $m
  1,386
  2,058
  2,748
  3,478
  4,248
  5,057
  5,905
  6,791
  7,717
  8,682
  11,141
  12,187
  13,277
  14,411
  15,591
  16,820
  18,100
  19,433
  20,823
  22,272
  23,784
  25,362
  27,010
  28,732
  30,532
  32,415
  34,384
  36,446
  38,605
  40,866
Net income, $m
  3,748
  5,563
  7,429
  9,404
  11,486
  13,673
  15,965
  18,362
  20,864
  23,473
  30,121
  32,951
  35,897
  38,963
  42,155
  45,477
  48,937
  52,542
  56,300
  60,217
  64,305
  68,572
  73,028
  77,683
  82,550
  87,640
  92,965
  98,539
  104,376
  110,490

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  157,469
  178,097
  199,985
  223,106
  247,435
  272,957
  299,660
  327,542
  356,609
  386,874
  418,358
  451,091
  485,112
  520,465
  557,205
  595,390
  635,089
  676,376
  719,331
  764,043
  810,606
  859,118
  909,689
  962,429
  1,017,460
  1,074,907
  1,134,903
  1,197,588
  1,263,108
  1,331,618
Adjusted assets (=assets-cash), $m
  157,469
  178,097
  199,985
  223,106
  247,435
  272,957
  299,660
  327,542
  356,609
  386,874
  418,358
  451,091
  485,112
  520,465
  557,205
  595,390
  635,089
  676,376
  719,331
  764,043
  810,606
  859,118
  909,689
  962,429
  1,017,460
  1,074,907
  1,134,903
  1,197,588
  1,263,108
  1,331,618
Revenue / Adjusted assets
  0.452
  0.452
  0.452
  0.452
  0.452
  0.452
  0.452
  0.452
  0.452
  0.452
  0.452
  0.452
  0.452
  0.452
  0.452
  0.452
  0.452
  0.452
  0.452
  0.452
  0.452
  0.452
  0.452
  0.452
  0.452
  0.452
  0.452
  0.452
  0.452
  0.452
Average production assets, $m
  105,483
  119,301
  133,963
  149,450
  165,748
  182,844
  200,731
  219,409
  238,880
  259,153
  280,243
  302,170
  324,959
  348,641
  373,251
  398,830
  425,423
  453,080
  481,854
  511,805
  542,996
  575,493
  609,368
  644,697
  681,560
  720,042
  760,231
  802,221
  846,110
  892,003
Working capital, $m
  -21,424
  -24,230
  -27,208
  -30,354
  -33,664
  -37,136
  -40,769
  -44,563
  -48,517
  -52,635
  -56,918
  -61,372
  -66,000
  -70,810
  -75,809
  -81,004
  -86,405
  -92,022
  -97,866
  -103,950
  -110,285
  -116,885
  -123,765
  -130,940
  -138,427
  -146,243
  -154,406
  -162,934
  -171,848
  -181,169
Total debt, $m
  82,992
  101,558
  121,257
  142,066
  163,962
  186,931
  210,964
  236,059
  262,219
  289,457
  317,793
  347,253
  377,871
  409,689
  442,755
  477,122
  512,851
  550,009
  588,669
  628,910
  670,816
  714,477
  759,990
  807,457
  856,985
  908,687
  962,683
  1,019,099
  1,078,067
  1,139,726
Total liabilities, $m
  141,722
  160,287
  179,987
  200,795
  222,692
  245,661
  269,694
  294,788
  320,948
  348,186
  376,522
  405,982
  436,601
  468,419
  501,484
  535,851
  571,580
  608,738
  647,398
  687,639
  729,545
  773,207
  818,720
  866,186
  915,714
  967,416
  1,021,413
  1,077,829
  1,136,797
  1,198,456
Total equity, $m
  15,747
  17,810
  19,999
  22,311
  24,744
  27,296
  29,966
  32,754
  35,661
  38,687
  41,836
  45,109
  48,511
  52,047
  55,720
  59,539
  63,509
  67,638
  71,933
  76,404
  81,061
  85,912
  90,969
  96,243
  101,746
  107,491
  113,490
  119,759
  126,311
  133,162
Total liabilities and equity, $m
  157,469
  178,097
  199,986
  223,106
  247,436
  272,957
  299,660
  327,542
  356,609
  386,873
  418,358
  451,091
  485,112
  520,466
  557,204
  595,390
  635,089
  676,376
  719,331
  764,043
  810,606
  859,119
  909,689
  962,429
  1,017,460
  1,074,907
  1,134,903
  1,197,588
  1,263,108
  1,331,618
Debt-to-equity ratio
  5.270
  5.700
  6.060
  6.370
  6.630
  6.850
  7.040
  7.210
  7.350
  7.480
  7.600
  7.700
  7.790
  7.870
  7.950
  8.010
  8.080
  8.130
  8.180
  8.230
  8.280
  8.320
  8.350
  8.390
  8.420
  8.450
  8.480
  8.510
  8.540
  8.560
Adjusted equity ratio
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  3,748
  5,563
  7,429
  9,404
  11,486
  13,673
  15,965
  18,362
  20,864
  23,473
  30,121
  32,951
  35,897
  38,963
  42,155
  45,477
  48,937
  52,542
  56,300
  60,217
  64,305
  68,572
  73,028
  77,683
  82,550
  87,640
  92,965
  98,539
  104,376
  110,490
Depreciation, amort., depletion, $m
  15,932
  17,314
  18,780
  20,329
  21,958
  23,668
  25,457
  27,325
  29,272
  31,299
  28,024
  30,217
  32,496
  34,864
  37,325
  39,883
  42,542
  45,308
  48,185
  51,181
  54,300
  57,549
  60,937
  64,470
  68,156
  72,004
  76,023
  80,222
  84,611
  89,200
Funds from operations, $m
  19,680
  22,877
  26,209
  29,732
  33,444
  37,341
  41,422
  45,687
  50,136
  54,772
  58,145
  63,168
  68,393
  73,827
  79,480
  85,360
  91,480
  97,850
  104,485
  111,398
  118,605
  126,121
  133,964
  142,153
  150,706
  159,644
  168,988
  178,761
  188,987
  199,690
Change in working capital, $m
  -2,631
  -2,807
  -2,978
  -3,146
  -3,310
  -3,472
  -3,633
  -3,793
  -3,955
  -4,118
  -4,283
  -4,453
  -4,629
  -4,810
  -4,998
  -5,195
  -5,401
  -5,617
  -5,844
  -6,083
  -6,335
  -6,600
  -6,880
  -7,175
  -7,487
  -7,816
  -8,163
  -8,528
  -8,914
  -9,321
Cash from operations, $m
  22,311
  25,683
  29,187
  32,878
  36,754
  40,813
  45,055
  49,480
  54,090
  58,890
  62,429
  67,622
  73,022
  78,637
  84,478
  90,555
  96,881
  103,467
  110,329
  117,481
  124,939
  132,721
  140,844
  149,328
  158,193
  167,460
  177,151
  187,290
  197,901
  209,011
Maintenance CAPEX, $m
  -9,251
  -10,548
  -11,930
  -13,396
  -14,945
  -16,575
  -18,284
  -20,073
  -21,941
  -23,888
  -25,915
  -28,024
  -30,217
  -32,496
  -34,864
  -37,325
  -39,883
  -42,542
  -45,308
  -48,185
  -51,181
  -54,300
  -57,549
  -60,937
  -64,470
  -68,156
  -72,004
  -76,023
  -80,222
  -84,611
New CAPEX, $m
  -12,970
  -13,818
  -14,662
  -15,487
  -16,297
  -17,096
  -17,888
  -18,677
  -19,471
  -20,273
  -21,090
  -21,927
  -22,789
  -23,682
  -24,610
  -25,579
  -26,593
  -27,657
  -28,774
  -29,951
  -31,190
  -32,497
  -33,875
  -35,329
  -36,863
  -38,482
  -40,189
  -41,990
  -43,890
  -45,892
Cash from investing activities, $m
  -22,221
  -24,366
  -26,592
  -28,883
  -31,242
  -33,671
  -36,172
  -38,750
  -41,412
  -44,161
  -47,005
  -49,951
  -53,006
  -56,178
  -59,474
  -62,904
  -66,476
  -70,199
  -74,082
  -78,136
  -82,371
  -86,797
  -91,424
  -96,266
  -101,333
  -106,638
  -112,193
  -118,013
  -124,112
  -130,503
Free cash flow, $m
  90
  1,317
  2,595
  3,994
  5,512
  7,143
  8,883
  10,729
  12,679
  14,728
  15,424
  17,670
  20,015
  22,459
  25,004
  27,651
  30,405
  33,268
  36,247
  39,345
  42,569
  45,925
  49,420
  53,062
  56,860
  60,822
  64,958
  69,277
  73,790
  78,508
Issuance/(repayment) of debt, $m
  16,070
  18,566
  19,699
  20,808
  21,897
  22,969
  24,033
  25,094
  26,160
  27,238
  28,336
  29,460
  30,619
  31,818
  33,065
  34,367
  35,729
  37,158
  38,660
  40,241
  41,906
  43,662
  45,513
  47,467
  49,528
  51,702
  53,996
  56,416
  58,968
  61,659
Issuance/(repurchase) of shares, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  16,070
  18,566
  19,699
  20,808
  21,897
  22,969
  24,033
  25,094
  26,160
  27,238
  28,336
  29,460
  30,619
  31,818
  33,065
  34,367
  35,729
  37,158
  38,660
  40,241
  41,906
  43,662
  45,513
  47,467
  49,528
  51,702
  53,996
  56,416
  58,968
  61,659
Total cash flow (excl. dividends), $m
  16,161
  19,882
  22,294
  24,803
  27,408
  30,112
  32,916
  35,824
  38,839
  41,967
  43,759
  47,131
  50,634
  54,277
  58,069
  62,018
  66,134
  70,427
  74,907
  79,586
  84,475
  89,586
  94,933
  100,529
  106,388
  112,524
  118,954
  125,693
  132,758
  140,167
Retained Cash Flow (-), $m
  -3,264
  -2,063
  -2,189
  -2,312
  -2,433
  -2,552
  -2,670
  -2,788
  -2,907
  -3,026
  -3,148
  -3,273
  -3,402
  -3,535
  -3,674
  -3,819
  -3,970
  -4,129
  -4,296
  -4,471
  -4,656
  -4,851
  -5,057
  -5,274
  -5,503
  -5,745
  -6,000
  -6,268
  -6,552
  -6,851
Prev. year cash balance distribution, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
  12,897
  17,820
  20,105
  22,490
  24,975
  27,560
  30,246
  33,035
  35,932
  38,940
  40,611
  43,857
  47,232
  50,742
  54,395
  58,200
  62,164
  66,298
  70,611
  75,114
  79,818
  84,735
  89,876
  95,255
  100,885
  106,780
  112,954
  119,424
  126,206
  133,316
Discount rate, %
  7.70
  8.09
  8.49
  8.91
  9.36
  9.83
  10.32
  10.83
  11.38
  11.95
  12.54
  13.17
  13.83
  14.52
  15.25
  16.01
  16.81
  17.65
  18.53
  19.46
  20.43
  21.45
  22.52
  23.65
  24.83
  26.07
  27.38
  28.75
  30.18
  31.69
PV of cash for distribution, $m
  11,975
  15,253
  15,745
  15,983
  15,967
  15,704
  15,210
  14,507
  13,625
  12,599
  11,070
  9,938
  8,770
  7,604
  6,474
  5,409
  4,431
  3,556
  2,793
  2,145
  1,609
  1,178
  840
  584
  394
  258
  164
  101
  60
  35
Current shareholders' claim on cash, %
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Telefonica, S.A. is an integrated and diversified telecommunications group operating in Europe and Latin America. The Company's services and products include Mobile business, Fixed-line telephony business and Digital services. Its segments include Telefonica Spain, Telefonica Brazil, Telefonica Germany, Telefonica United Kingdom and Telefonica Hispanoamerica (formed by the Company's operators in Argentina, Chile, Peru, Colombia, Mexico, Venezuela and Central America, Ecuador and Uruguay). These segments are engaged in activities relating to wireline, wireless, cable, data, Internet and television (TV) businesses and other digital services in accordance with each location. It offers a range of mobile and related services and products to personal and business customers. It offers traditional fixed telecommunication services, Internet and broadband multimedia services and data and business-solutions services. It offers a range of digital services, such as Internet of Things (IoT).

FINANCIAL RATIOS  of  Telefonica ADR (TEF)

Valuation Ratios
P/E Ratio 17
Price to Sales 0.8
Price to Book 2.2
Price to Tangible Book
Price to Cash Flow 3
Price to Free Cash Flow 9.7
Growth Rates
Sales Growth Rate -5.2%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -2.3%
Cap. Spend. - 3 Yr. Gr. Rate -1%
Financial Strength
Quick Ratio 0
Current Ratio 0
LT Debt to Equity 236.1%
Total Debt to Equity 315.8%
Interest Coverage -1
Management Effectiveness
Return On Assets 0.6%
Ret/ On Assets - 3 Yr. Avg. 1.2%
Return On Total Capital 3.1%
Ret/ On T. Cap. - 3 Yr. Avg. 2.5%
Return On Equity 14%
Return On Equity - 3 Yr. Avg. 10.5%
Asset Turnover 0.4
Profitability Ratios
Gross Margin 52.3%
Gross Margin - 3 Yr. Avg. 52.3%
EBITDA Margin 2.1%
EBITDA Margin - 3 Yr. Avg. 3.6%
Operating Margin 10.5%
Oper. Margin - 3 Yr. Avg. 10.5%
Pre-Tax Margin 6.2%
Pre-Tax Margin - 3 Yr. Avg. 5%
Net Profit Margin 4.6%
Net Profit Margin - 3 Yr. Avg. 4.2%
Effective Tax Rate 26.1%
Eff/ Tax Rate - 3 Yr. Avg. 17.2%
Payout Ratio 122.7%

TEF stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the TEF stock intrinsic value calculation we used $62435 million for the last fiscal year's total revenue generated by Telefonica ADR. The default revenue input number comes from 2017 income statement of Telefonica ADR. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our TEF stock valuation model: a) initial revenue growth rate of 14% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 7.7%, whose default value for TEF is calculated based on our internal credit rating of Telefonica ADR, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Telefonica ADR.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of TEF stock the variable cost ratio is equal to 67.9%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $14009 million in the base year in the intrinsic value calculation for TEF stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 6.2% for Telefonica ADR.

Corporate tax rate of 27% is the nominal tax rate for Telefonica ADR. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the TEF stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for TEF are equal to 148.2%.

Life of production assets of 10 years is the average useful life of capital assets used in Telefonica ADR operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for TEF is equal to -30.1%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $12483 million for Telefonica ADR - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 5038 million for Telefonica ADR is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Telefonica ADR at the current share price and the inputted number of shares is $43.8 billion.

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